How to manage a huge economic hit on your main asset class? How to buy and add value to properties today? Christopher Rising, co-founder of Rising Realty Partners, a real estate investment firm that manages 5M square feet of assets worth $1.5B will share his extensive expertise with us during hard times
Tell us a little bit about you.
I’m the co-founder of Rising Realty Partners, a company I founded with my father in 2011. We’ve grown it from just an idea of let’s go buy a building, and we’ve now grown it to about 5 million square feet. We are in four asset classes: office, data, multifamily, and industrial. We’ve grown from two people and an analyst to now we’re about 45 people. We are vertically integrated in Denver, Houston, Las Vegas, and throughout Southern California. I think we’re the second largest owner of office in downtown Los Angeles, which sounds great if we hadn’t gone through two years of this pandemic. It’s been a little difficult.
Just like any entrepreneurs and real estate investors, we all deal with whatever comes our way. That is just part of the journey. And it’s great to hear that from someone like you that has such a huge footprint.
I’m reminded of something my father often says, and he’s now 80 years old, he said, I’ve been around long enough, through all these real estate cycles to hear people say that everything’s changed, and nothing bad is going to happen again in the cycles, I’ve been around long enough to hear that said again, and again, and again. He has been in real estate since the early 70s. He has seen a lot of recessions and a lot of reasons why real estate slows down. And I think it’s human nature, because real estate is so tied to human nature. But I will tell you this, I never thought that I would look at a pro-forma of an office building and look at the parking revenue and say, I really have to prepare for that pandemic, nobody is going to drive and pay for parking for two years. I don’t know of anyone who could have done that. I think all of us who own office in major cities, at least in cities that have been more shut down, have been feeling this pain.
If you want to talk about it, I would love to hear how you guys dealt with that because that’s part of the journey.
For better or for worse, our social policy was to absolutely change our system and not allow for evictions, whether it’s residential or whether it’s commercial, the system is set up that when a tenant is in default for not paying rent, one of the things that we can do to lower our damages is to have the tenant leave and then try to release the project. But when the county and the state and the federal government passed rules trying to protect people, they’re making a choice. They’re choosing tenants over landlords. And one of the things I learned in all this is that there’s this impression that every landlord has deep pockets, and we’ll take the brunt of it. But that’s not how it works, we run a business that has to sign loan commitments, that has investors and fiduciaries. When we call Rising a family business, it’s not because it’s family owned assets for 100 years, and we can take two years without getting paid. I think that has been the hardest thing.
What did we do from day one was, we did try to work with our tenants. When someone came to us or someone chose not to pay the rent, the first thing we would say was, give us your financials, let’s be a partner here, and let us see. You kind of smoke some people out when you do that, because I can’t tell you how many law firms felt like a lease was a one sided obligation, and they didn’t have to pay if they didn’t want to. But that’s not true. We’d start with the, Hey, show us the books. Then we went to, Have you applied for a PPP loan, because those were specifically designed to pay salaries and to pay rent. And then if they didn’t do that, we said, have you gone to business insurance, but we knew that they weren’t fronting any of this. But if someone worked and tried to solve a problem, we worked with them. And in fact, I would say that every one of our retail tenants, our office building, I think to a tee, we are working out deals with them now, because most of them haven’t paid rent in two years, so that we can keep them, but they also need to do things like extend their term or something. We’re not trying to be punitive, and say, you owe us late rent. We’re just trying to almost close our eyes and pretend the last two years didn’t happen. We got through it. We paid our mortgages and all that. But in return, you have to give us a little more term on your leases. But it still hasn’t been figured out.
I think that on the multifamily side, there are a lot of problems that are hidden right now. Because you can’t evict people, all you can do is served with a notice to pay. And I think when all of this gets lifted, you’re going to see a lot of residential tenants whose credit gets really destroyed. It’s one thing if you couldn’t pay rent, and you worked it out with your landlord, it’s another thing if you chose not to pay rent. Those who chose not to, it’s not a free lunch. I think that’ll all work out. It’s been a challenge, I look back to March of 2020, and remember the fear on everyone’s face on our zoom calls. But I think the team stuck together well, we use technology in a way a lot of other firm real estate firms don’t. So we didn’t have any problem, we already had a project management system, we use Asana, and Google workspace, a lot of people use Microsoft Teams, so we didn’t have a problem with that.
We’re pretty much back in the office, but I’ll tell you that after two years, the traditional work hours are over. What we’ve done is we’ve turned this into three days a week in the office, and you can choose your own work hours, it’s about productivity. But if there are in person meetings scheduled, you’re expected to be at the in person meeting. I think it gives people flexibility on the edges. So that’s how we’ve gotten through it is we’re just trying to adapt. From an office perspective, I think the business has fundamentally changed. The reason is offices started with people need a place to store books and papers, and they couldn’t do it in their home, so they went to an office. But we all know that that has all changed. You don’t go in the office to get work done. You go to an office to collaborate, and I think you’re going to see the footprint change, not necessarily get smaller, but I think some will get smaller, but some will get bigger. But how in person interaction changes, we are never going back. The days when I was wearing a navy blue suit, white shirt, tie, and hard soled shoes and get in by seven in the morning and leave at seven o’clock at night, I think that American society is long gone.
I agree, I thought people were going to go back to the office a year in, but now they’re just getting used to it too much. And more and more companies are adopting the flexible working from home, and I think that is changing for good.
It’s hard to generalize. There are certain businesses that they figured out that, we don’t need office space, because that’s just the nature of the business. But that’s not most businesses. Most businesses are mentorship based, they take an apprenticeship, and those will have people come back. But I think what you’ll see and I just read an article in Fortune by Andy Cohen of Gensler, who was saying that their view is that the office space will all be around collaboration. And the idea that people are in open seating a lot, and all these workstations, and things like that. That won’t be it, you’ll have some private offices to work in, senior people will probably have private offices, but for most people it will be more of a hoteling feel, but it’ll feel much more residential, areas with couches. And I also think that the way people are going to get people to come back to work is you have the best technology available because people can’t afford this stuff in their home. And you make it where people just want to be in the office because internet’s faster, I could do all these things there. I think it’ll be a landlord and big employer amenity fest over the next couple of years trying to get people to come back to be in the office together for certain periods of time.
I would love to hear about your last acquisition, how did you analyze it find value add, and why did you end up purchasing it?
I’ll talk about the last one, which was in Las Vegas, we’ve taken our industrial strategy and really focused on something called multi-tenant light industrial. I think when people talk about industrial today, they sometimes forget, there’s different forms of industrial real estate, the one that is trading at unbelievably low cap rates are the big box, logistics based industrial buildings. You think of a big Amazon center or distribution center, or just anybody who’s moving product, those are trading at very low cap rates are very hard to buy, because you have to buy them in scale. You’re not really selling one offs, it’s usually portfolios. But people are really buying the cash flow stream and the quality of that credit. So that is not an area we have participated in, even though my father when he was in development, that’s what they did. We’ve taken a different approach and focused on this multi-tenant light industrial product that really isn’t getting built much anymore, especially in major CBDs. It’s not getting built, because it’s hard to get entitled, if you’re going to build something in industrial, you’d prefer to build the big box industrial, it costs less, you get more for your money.
We have found that there’s a real demand in multi-tenant light industrial. JLL wrote a great report on it, and it comes down to scarcity. There’s just a lack of supply, there has been a fundamental change in business. A lot of times companies would have an industrial or manufacturing off site, but they always wanted to have their nice office somewhere. In the last couple years, that’s become less important. And what you’re seeing is, businesses now do their own distribution, the buildings are 25-150,000 square feet but you’re seeing 10,000 foot slices of these buildings where 70% of the space is warehouse with a dock high or a ground level dock. And about 30% Is office. And that’s the new world we live in for a lot of Americans. We think it’s a great diverse tenant base, we’re going to markets that we think have a tremendous amount of growth, Houston with their port, North Las Vegas with the growth that’s happening in Southern Nevada. We’re looking at one in Northern California, one in Long Beach.
What’s also interesting is that we’ve really become a believer in crowdfunding. And I think it’s a natural evolution of the broker dealer network that has been going on for a while. Now Blackstone is the biggest player, but for those who don’t remember or weren’t aware about the 1980s, there was something that was called Tenants in Common, TIC syndicators, you would buy a building with 100 other people and each would be a tenant in common. That didn’t work when there were reasons for capital calls and the economy changing. That TIC world blew up into this non traded private REIT world, where people would get on the broker dealer networks of the Merrill Lynch’s and the Charles Schwab’s and they’d raise money that way. Early on in the 90s, in the 2000s, the fee load was really high for these people who were doing it.
For every $100 your Merrill Lynch broker was taking as much as 23 of those dollars, that’s a 23% load factor, and when Blackstone, Hines and KBS saw how much money people were raising, they moved into that market. And they did it with reasonable fees. Blackstone raises $20 billion a month or something, to go and find deals that most of them have to have cash flow. Our view is the evolution of that is what you’re seeing with companies like Fundrise, Realty Mogul and Crowd Street, instead of going to the broker dealer network and getting grandma and grandpa to give you $10k, you go right to the crowd. We are focused on accredited investors. That’s so we’re not doing Reg A. We’re doing a deal at a time with a proven crowdfunding site. We are very close with all three of them, and they all have their own unique characteristics. But we’ve had a really good run of success with with Realty Mogul lately, and we felt that this multi-tenant light industrial strategy would really work on their platform. And we were amazed, surprised, and pleased that we did a full LP raise, we needed to raise about 7.5 million dollars of LP money, we put in our on our portion of it, and we were able to raise when they put it up on their site. We raised $1.5M dollars in 24 hours, $3M in 48, and all $7.5M in a week. That told us a lot. We are doing another raise right now, it’s a bigger total dollar amount, and that’s going to be less than 50% of the capital stack, we’ve brought in our own investors, and we’re putting our own money in. That one has gone on their site recently, if it’s not oversubscribed, it’s going to be very soon before we close.
I think it’s an appetite that people have because how does someone who perhaps has been a successful doctor, or dentist, and has a bunch of 401k money, but they don’t want to keep it in their bank at 0%, they feel the stock market is over priced, this is their chance to take $50,000 out of that, put it in a real estate deal that’s going to get you a north of 7% cash on cash a year and it has a three to five year hold. The downside is there is no liquidity. If someone needed that money, they have to live with the lifecycle of the deal. The other thing is we have a very specific business plan with this, which is to add value, we go in re-lease what needs to be re-leased, improve the property, and we’re out in three years, or five years, depending on what the business plan is. I think people like that. We also promise no capital calls, those investors have, I can’t say 100% protection because deals can blow up and tenants can go away, and I would never say that, I’ve been in the business too long, but they are more protected than we are.
As the GP, if there is a need to call capital, it comes from us, so there are a lot of positives to being an investor in crowdfunding. It’s early, it’s still frowned upon. People are always afraid of, What if you have 150 investors, that’s 150 K-1s. And that is very true. But by keeping it is an LLC, not a C Corp, people get a K-1, and they get to take depreciation, they get to defer tax, whereas a lot of these other sites have turned them into REITs. And there’s nothing wrong with a REIT, but you’re getting a distribution, so you don’t get any of the tax related benefits of owning real estate.
One of the things we think about in multi-tenant light industrial, and this is no secret, we think there are ways to improve the project, bring the cap rate down upon a sale, and compete more with the big box distribution. You can take a project that maybe doesn’t have a dock high space and create a common dock. Create a better parking situation, a lot of these deals we’re finding, have dollars being left around the edges, because it’s not a sophisticated seller or owner, and they’re selling it to reap the harvest, but they don’t really know how to operate. They aren’t professionals in operating. We think it’s a great strategy. The Cheyenne deal for those who invested, we predicted that we’d be having a distribution in our pro-forma and it’s all coming to pass. We closed on that in July and the first distribution will be on November 15, 45 days after the first quarter that we’ve owned the asset. So I think it’s a good strategy. I think money is going to rush into it and it’s going to be tough to find deals.